With a flurry of deals in recent months, Google (GOOG) has seemed willing to pay handsomely for attractive companies and contracts. The online ad leader has received mixed reviews for acquisitions of Doubleclick, Feedburner, and YouTube, as well as their exclusive ad deal with MySpace. With news that Facebook was negotiating with both Google and Microsoft (MSFT) on an international ad deal and a minority investment, it would not have been surprising, given their cash hoard and past deal history, to see Google outbid Gates & Company for the deal, even though Microsoft currently runs ads on Facebook’s domestic site.

In a shift for Google, reports are hitting the wires that Facebook has secured a $240 million investment from Microsoft, in exchange for an expanded ad deal that covers Facebook’s foray into the international market. MSFT is getting a 1.6% stake, which values Facebook at a whopping $15 billion. All this for a company that supposedly is on track for 2007 revenue and profits of $150 million and $30 million, respectively. That’s right, Microsoft is paying 100 times 2007 sales and 500 times 2007 earnings!

There is no doubt that adding Facebook to its arsenal of web advertising properties would have been a boon for Google, but given that Microsoft already has a relationship with them, it is not too shocking that they would expand their existing deal. While prices of less than $2 billion for YouTube and $100 million for Feedburner will likely turn out to be bargains, it was likely tougher to justify a $15 billion valuation for Facebook. Many Google shareholders are probably happy to see the company show some sort of financial restraint, even though Facebook is clearly a hot property in the social networking space.

As for Google stock, the shares have soared to $675 on the heels of another strong quarterly earnings report from the company. I still believe the stock will continue its rise, but future gains will likely be far more limited. I will likely want to sell stock when the forward P/E approaches 35 times, which right now would equate to about $718 per share.

For the bears who continue to point to the fact that Google’s market cap has irrationally matched or exceeded that of blue chip companies like Citigroup (C) and Wal-Mart (WMT), I would caution people against such comparisons. Lining up a software company side by side with a retailer or a bank really is comparing apples to oranges. Instead, I would suggest you compare Google’s valuation with other software companies.

With a low 30’s forward P/E ratio, given Google earnings growth projections over the next 3 to 5 years, I think investors will conclude that Google’s share price is not only quite reasonable, but will continue to rise if the company can deliver earnings growth rates in the 20 to 30 percent range annually for the next several years. Even if you factor in decelerating profit growth as well as continued P/E contraction, you can still project a stock price meaningfully higher than current levels over the longer term.

I certainly would not disagree that adding Facebook would be an incremental positive for the Google story. I think the newsworthiness of the story from GOOG’s position is that they decided against overpaying for the deal. Time will tell whether or not Microsoft got a good deal or not, but it does appear that Google is showing more restraint, which is notable in my view.

Google has simply played Microsoft for Facebook; given Facebook’s existing and working relation with Seatlle it was easy to see which way they’d lean…but they played the sitution and Google played it even better, knowing from the start they won’t win…so they only could make Microsoft lose more 🙂

Microsoft is doing everything it can to regain online ad revenue from Google. Which do you think will generate more revenue, Facebook or AOL? Microsoft got a sweet deal here and put Google on the defensive, a place they are probably not used to. Good call on the part of Microsoft’s Directors

Microsoft’s ponying up a $15 billion valuation for Facebook is absolutely ridiculous. I’m sorry. But, the company has yet to prove that it can monetize effectively. It’s been 4 years and I know Facebook has been concentrating on improving its platform and offerings and I don’t disagree that Facebook has put out some very high quality web platforms ranging from their development API to just the features that are now included within the network. But, it only has $150-$200 million in revenue mostly from a lucrative Microsoft ad deal and some of the worst click-thru rates online. All this despite the fact that they bill themselves as being uniquely able to access the oft sought after 18-35 demographic. Microsoft basically took a big investment in a company that it is already financially supporting. I don’t like the deal and I’m glad Google didn’t play.

Blog Archive by Category

Peridot Capital Management LLC is a registered investment advisor in the states of Maryland, Missouri, Texas, and Washington. The firm may not transact business in states where it is not appropriately registered or excluded and/or exempted from registration. In most states, a registered investment advisor is exempt from registration if it has fewer than six clients who are residents of that state. As a result, Peridot Capital Management LLC is permitted to provide services to residents outside of the states listed above and when required will apply for registration in additional states. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

The content published on our blog represents the opinions of Mr. Brand and he and/or his clients may hold positions in securities discussed. Such positions will be disclosed at the time of publication, although subsequent changes to those positions will be made without notification. The information contained in blog posts is believed to be accurate when published, however, mistakes could be made. As a result, do not rely on the content exclusively for your investment due diligence.
The commentaries published do not way constitute investment advice, as readers' personal investment goals and risk tolerances will dictate which investments are appropriate for them. Our blog is meant to be one of many sources for readers to conduct their own research into specific investments. Consult an investment professional before acting solely on information found on this site. If you do not have an investment professional to work with, you may contact Peridot Capital Management LLC directly.